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Labor protection, ownership concentration, and cost of equity capital: international evidence
Teresa Chu1; In‑Mu Haw2; Simon S. M. Ho3; Xu Zhang1
Source PublicationReview of Quantitative Finance and Accounting

In this study, we investigate how labor protection institutions and the presence of controlling shareholders interact to determine a frm’s cost of equity capital in an international setting. Our frm- and country-level analyses reveal that frms in countries with greater labor rights have a higher cost of equity, over and above the diferences explained by investor protection environments and frm- and country-level risk factors. We fnd that operating leverage and information asymmetry serve as channels through which labor protection increases the cost of equity capital. More interestingly, the detrimental efect of labor protection on the cost of equity is mitigated in the presence of controlling shareholders, especially in the case of a family controlling owner, indicating the efectiveness of controlling owners at coping with difcult labor relations. The economic signifcance of this advantage is non-trivial: a one-unit increase in the labor market regulation index increases the annual cost of equity by 0.776% in widely held frms, whereas it increases by only 0.415% in frms with controlling shareholders. Our study identifes better labor relations as a potential channel through which concentered ownership afects the interaction of labor power and the cost of equity capital.

KeywordLabor Protection  Cost Of Equity Capital  Controlling Shareholders  Labor Relation  Equity Risk
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Document TypeJournal article
CollectionFaculty of Business Administration
Corresponding AuthorTeresa Chu; In‑Mu Haw; Simon S. M. Ho; Xu Zhang
Affiliation1.Faculty of Business Administration, University of Macau, Avenida da Universidade, Taipa, Macao
2.M.J. Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA
3.School of Business, Hang Seng University of Hong Kong, Shatin, NT, Hong Kong
Recommended Citation
GB/T 7714
Teresa Chu,In‑Mu Haw,Simon S. M. Ho,et al. Labor protection, ownership concentration, and cost of equity capital: international evidence[J]. Review of Quantitative Finance and Accounting,2019:1-37.
APA Teresa Chu,In‑Mu Haw,Simon S. M. Ho,&Xu Zhang.(2019).Labor protection, ownership concentration, and cost of equity capital: international evidence.Review of Quantitative Finance and Accounting,1-37.
MLA Teresa Chu,et al."Labor protection, ownership concentration, and cost of equity capital: international evidence".Review of Quantitative Finance and Accounting (2019):1-37.
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